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November 20, 2012

Jeremy Grantham: Growth as We Knew It ‘Gone Forever’

Doomsaying hedge fund manager says data make clear we’re in a new era of 1% growth; echoes of Research Affiliates’ Christopher Brightman

If it is true that great minds think alike, and therefore might like one another, hedge fund star Jeremy Grantham should meet Christopher Brightman of investment management firm Research Affilliates.

The Boston-based founder of Grantham Mayo Van Otterloo, like Brightman, his like-minded colleague in Newport Beach, Calif., argues that the 3%-plus annual GDP growth that Americans have long taken for granted is a thing of the past – "gone forever," as he puts it. Similarly, Grantham (left) argues that GDP growth will now hover at about 1% per year in the coming decades; (Grantham says “about 0.9%,” Brightman says 1%).

Both analysts make a point of stating that their analysis is based on quite reliable data: “Unusually for things economic, these estimates are much more likely than the typical estimates to be quite accurate, for much is derived from the existing population profile and social trends, which, like birth rates, change very slowly,” as Grantham puts it.

Brightman calls the data “highly reliable,” citing as an example that we can closely estimate the number 65-year-olds next year based on this year’s number of 64-year-olds.

Both also lament that the decline now in progress is not “fully appreciated yet by the business and investment community,” as Grantham puts it, citing the Federal Reserve’s assumption that we will revert to previous growth rates, while Brightman cites the rosy scenarios proffered by both the administration and Congressional Budget Office.

Both base their analysis on population effects and productivity, using data from the U.S. Census Bureau, and both extensively cite the same research by Northwestern University professor Robert Gordon on the long-term decline in global economic growth, which AdvisorOne wrote about in September.

While the core of both analyses match fairly precisely – reporters love second sources – Grantham’s letter is some 10 pages longer than Brightman’s and goes on to address the sort of dystopian themes such as environmental degradation and resource competition for which he long been known.

In that regard, a typically cheerless thought from Grantham goes as follows:

“Even at a zero growth rate in physical output, we will still be steadily exhausting our non-renewable resource reserves and will still be experiencing the effects of their rising costs. The bottom line for the U.S. is that if resource prices rise at an accelerated 9%, then obtaining sufficient resources will use up all of our growth potential in just 11 years. After that, the balance of the economy will be in reverse!”

Grantham did offer a nice tidbit of “good news.” The same key factor that will be depressing GDP – an aging population inputting few man hours into the economy – will eventually come to the rescue of our ailing job market. He cites the case of the Japanese, whose demographic decline is well known. Less well known is that the fact that their unemployment rate is half the U.S. rate.